Get Newsletter Submit a Tip

Report: Several Subprime Auto Lenders Shutting Down

April 6, 2018 0 Comments

Following loan losses and slim margins leading banks and private equity owners to withdraw funding, several small subprime auto lenders are closing up or shutting down.

Florida-based Summit Financial Corp. filed for bankruptcy last month after lenders, including Bank of America Corp., said the car finance company “misreported losses from soured loans.” A creditor filed to force Atlanta-based Spring Tree Lending into bankruptcy last week, after a group of investors accused it of fraud. And Pelican Auto Finance, specializing in “deep subprime” borrows, wound down last month among shrinking profit margins.

The current situation has parallels with the subprime mortgage crisis of the previous decade, with rising interest cases triggering more loan losses.

“There’s been a lot of generosity and not a lot of discretion on the part of lenders and investors. There’s going to be more capitulation,” said Chris Gillock, a banker at Colonnade Advisors.

A lawyer for Summit said “restructuring in a Chapter 11 bankruptcy proceeding is the best strategy to ensure its long term success,” and said the company working with vendors and lenders to meet obligations, according to Bloomberg.

The financial system losses are expected to be more manageable this time around, as auto lending is smaller compared to mortgage lending. Plus, Wall Street “hasn’t packaged as many of the loans into complicated securities and derivatives.”

At the end of September 2017, there were about $280 billion in outstanding subprime auto loans, according to the Federal Reserve Bank of New York. Compare that to the $1.3 trillion in subprime mortgage debts at the beginning of 2007.

“When you think about the effects of housing versus autos, they’re a lot different,” said Kevin Barker, stock analyst at Piper Jaffray & Co. He added that losses for car loans are less severe than mortgages, borrowers pay them faster, and the collateral is easier to repossess. With home loans, many states have a lengthy court process when it comes to foreclosures.

“If you stop making payments on your car for three months,” Barker said, “someone can come out to your driveway and take it.”

It doesn’t mean the losses won’t hurt some money managers and companies, though. Private equity firms and investors have dumped billions of dollars into those subprime auto lenders in the hopes of big profits. But after a peak in the first quarter of 2016 (at $134 billion), subprime and near-prime auto lending volumes have declined, according to New York Fed data. Companies were left fighting for fewer loans.

“There’s been intense competition. The margins just aren’t there,” said Troy Cavallaro, Pelican’s CEO. “We were waiting it out to hopefully see the tides turn. We didn’t see it happen in the timeline we expected.”

Looser lending resulted in increased numbers of subprime borrowers failing to stay on top of bills. At the end of the third quarter last year, 9.7 percent of loans made to the riskiest borrowers by auto-finance companies were overdue by 90 or more days, according to a 2017 study by New York Fed. It marked the highest percentage since 2010.

It’s not a new cycle by any means. Between 1997 and 1999, 41 lenders either filed for bankruptcy, shut down, or were acquired as losses due to pile-ups of bad loans, according to Moody’s Investors Service.

The potential of “easy money” might have spurred lenders to be looser when it came to underwriting and failing to vet borrowers’ incomes properly, Gillock said. In Summit’s bankruptcy documents, Bank of America said the company repossessed and sold millions of dollars worth without writing down loans, which allowed the company to hide operating losses and borrow more money.

A Spring Tree investor said he loaned $300,000 to the company in 2015 “with the understanding that his money would be fully secured and would be the first to get paid back if borrowers on auto loans defaulted,” according to the Bloomberg article.

In November, he filed a lawsuit against the company, saying he’d been defrauded. A separate investor filed to put the lender in involuntary bankruptcy in March.

“This industry goes through cycles,” said John Anglim, a senior director at consumer ABS group at S&P Global Ratings. “The cycle right now is that there’s a bit of tightening.”

About the Author:

Dave Martinson is a broadcast journalist for DrivingSalesNews. He has a background as a TV News Reporter, Anchor and Producer. He has also worked in Digital Marketing and Human Resources. He received his bachelor’s degree in Communication from Brigham Young University – Idaho. He’s married and originally from the state of Washington. He’s a huge football fan and enjoys the outdoors.